Posts from July 2008

Thursday, July 31, 2008

Yesterday, the Court of Appeal (First Appellate District, Division Four) handed down its third opinion (and its second published one) in the case between Mervyn's and Californians for Disability Rights: Californians for Disability Rights v. Mervyn's, LLC, ___ Cal.App.4th ___ (Jul. 30, 2008). In it, the Court held that Mervyn's violated the UCL's "unlawful" prong by failing to comply with the federal Americans with Disabilities Act (42 U.S.C. §§ 12101 et seq.). Today's San Francisco Chronicle has an article on the opinion.

For our purposes, the opinion's discussion of the procedural history is most interesting:

While this case was pending on appeal, the voters of California amended the statute under which the case had been prosecuted. The voters’ enactment, popularly known as Proposition 64, was passed in the California General Election on November 2, 2004, and went into effect the next day. (Cal. Const., art. II, § 10, subd. (a).) At the time this case was tried, the UCL authorized any person acting for the general public to sue for relief from unfair competition. (Californians for Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 228 (Mervyn’s).) “Standing to bring such an action did not depend on a showing of injury or damage.” (Ibid.) Proposition 64 amended the UCL to limit private enforcement to those who have suffered injury in fact and have lost money or property as a result of such unfair competition. (Ibid.) Proposition 64 did not state whether this new limitation applies to pending cases. (Id. at p. 229.)

On December 6, 2004, Mervyn’s moved to dismiss this appeal upon the claim that Proposition 64’s change in standing requirements apply to pending cases. We denied the motion because new legislative enactments are presumed to operate prospectively, rather than retroactively, to avoid unfair impairment of existing rights and obligations. In July 2006, the California Supreme Court reversed our ruling, upon concluding that application of Proposition 64’s standing requirements to pending cases would not constitute a retroactive application of the law because the initiative measure did not change any existing rights or obligations. (Mervyn’s, supra, 39 Cal.4th at pp. 232-234.) While the measure “withdraws the standing of persons who have not been harmed to represent those who have,” it did not impair any rights because lack of standing is a jurisdictional challenge that can be raised at any time in a legal proceeding. (Id. at pp. 232-233.) The high court reversed our denial of Mervyn’s motion to dismiss the appeal and remanded the case to us “for further proceedings consistent” with its opinion. (Id. at p. 234.)

On remand to this court, CDR asked leave to move for substitution of plaintiff on appeal—it did not contend that it had standing to appeal in its own right as a party aggrieved by the judgment under Code of Civil Procedure section 902. We denied CDR’s request and granted Mervyn’s motion to dismiss the appeal for lack of standing by CDR. CDR petitioned for review in the Supreme Court. The Supreme Court granted review and transferred the case to us with directions to vacate our decision and to reconsider the cause in light of United Investors Life Ins. Co. v. Waddell & Reed, Inc. (2005) 125 Cal.App.4th 1300 (United Investors) and Branick v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235 (Branick).

United Investors held that a plaintiff has standing to appeal dismissal of a UCL complaint following demurrer even if it has no authority to maintain its suit in superior court, because plaintiff “is sufficiently aggrieved by the dismissal of its complaint that it has standing to appeal under Code of Civil Procedure section 902.” (United Investors, supra, 125 Cal.App.4th at p. 1305.) Branick held that Proposition 64 does not forbid amendment of complaints in the trial court to substitute new plaintiffs for those who have lost standing under the new measure. (Branick, supra, 39 Cal.4th at pp. 241-242.) The “ordinary rules governing the amendment of complaints” apply. (Id. at p. 239.)

Upon reconsideration, we denied Mervyn’s motion to dismiss the appeal in a ruling we issued on April 17, 2007. We concluded that the two cases referenced by the high court, “when read in conjunction, lead to the following conclusion: CDR is a party aggrieved by entry of judgment against it and thus has standing to appeal the judgment even if CDR has no authority to maintain its suit in superior court (United Investors, supra, 125 Cal.App.4th at pp. 1304-1305); and, if CDR succeeds in its effort to reverse the judgment on appeal, it may seek leave in the superior court to amend its complaint to substitute a plaintiff who meets the Proposition 64 standing requirement.” (Branick, supra, 39 Cal.4th at pp. 240-244.) Mervyn’s petitioned for review in the Supreme Court, and the petition was denied on July 18, 2007.

The parties completed briefing on the merits of the appeal in January 2008, and the matter was argued and submitted for decision. We now turn to the trial court’s factual findings following the bench trial, and then proceed to discuss CDR’s claims raised on appeal.

Slip op. at 3-4. After concluding that the trial court erred by entering judgment in Mervyn's favor, the Court went on:

As discussed above, CDR lost standing as a plaintiff when the voters adopted Proposition 64, which amended the UCL law to limit private party lawsuits to those who have lost money or property as a result of alleged unfair competition. (Mervyn’s, supra, 39 Cal.4th at p. 227.) We therefore cannot remand the case with directions to enter judgment in CDR’s favor. However, CDR is entitled to an opportunity to amend its complaint to substitute a new plaintiff with standing. (Branick, supra, 39 Cal.4th at pp. 239, 242-243.) We therefore remand the case to the trial court so that CDR may file a motion for leave to amend its complaint. “On remand, should plaintiff[] in fact file a motion to amend, the superior court should decide the motion by applying the established rules governing leave to amend.” (Id. at p. 238, citing Code Civ. Proc., § 473.) If the court grants the motion, the court shall enter judgment in favor of the newly substituted plaintiff and determine the appropriate scope of injunctive relief. In fashioning injunctive relief, the court shall consider appropriate alternative means for making merchandise available to disabled individuals who are denied physical access to the merchandise.

Tuesday, July 29, 2008

The Seventh Circuit has recently handed down two new decisions relating to class action procedure (in addition to the new CAFA "less is not more" decision discussed at this blog post):

In Rahman v. Chertoff, ___ F.3d ___ (7th Cir. Jun. 26, 2008), the court reversed an order granting nationwide class certification of "a class of citizens who have been delayed in reentering the United States from abroad as a result of watch lists maintained by the Department of Homeland Security." [Via How Appealing]

This case presents the following issue: May a public entity retain private counsel to prosecute a public nuisance abatement action under a contingent fee agreement?

It is interesting that the issue is specifically stated in terms of the public nuisance cause of action. I've been following this case because of its potential to impact public prosecutor UCL actions. We'll just have to wait (for about two years) and see how broadly the opinion ends up being worded.

In Medina v. Safe-Guard Products, Int’l, Inc., ___ Cal.App.4th ___ (Jun. 19, 2008) (Fourth Appellate District, Division Three), the Court of Appeal held that an insurance contract issued by an unlicensed insurer is nonetheless enforceable. The Court had some harsh language for the plaintiff, who attempted to pursue a UCL "unlawful" prong claim based on the argument that the defendant's violation of the Insurance Code's licensure requirement rendered the insurance contract entirely void and therefore valueless:

The irony is that Medina’s class action is predicated on the idea that he bought an absolutely void contract and cannot enforce it (hence he is out the money he paid for the contract, having received nothing for it). That raises the problem of just exactly what are the consequences to a consumer who buys an insurance contract from an unlicensed, out of state insurer. Is the consumer really without insurance? We are unaware of any California authority addressing the question, hence we publish our answer to it in this opinion. As readers might readily intuit, California law most certainly does not leave consumers in the lurch when they inadvertently purchase an insurance policy from an unlicensed insurer.

Slip op. at 2 (footnote omitted); see also id. at 7 ("[T]he case is a little more complicated ..., because it is Medina who, in this litigation, actually does not want the contract to be enforceable by him. He'd rather be a class action plaintiff whose case depends on the idea that the insurance contract is not enforceable." (Emphasis in original.)).

The opinion goes on:

[H]olding an insurance contract void because the insurer was not licensed is about the worst possible remedy for the illegality of the insurer’s unlicensed status. To do so would be incredibly harmful to consumers who unknowingly purchased insurance from unlicensed insurers, and who, all of a sudden, would find themselves stuck with a loss which they thought they validly insured against. (See McIntosh v. Mills, supra, 121 Cal.App.4th at p. 347 [noting “the harsh results that might be visited on innocent parties to a contract when their agreement is voided for illegality”].)

Id. at 5. Then, relying entirely on Hall v. Time Inc., 158 Cal.App.4th 847 (2008), the court concluded that the plaintiff had suffered no injury in fact and therefore lacked standing under Proposition 64:

Medina has not alleged that he didn’t want wheel and tire coverage in the first place, or that he was given unsatisfactory service or has had a claim denied, or that he paid more for the coverage than what it was worth because of the unlicensed status of Safe-Guard. He hasn’t suffered any loss because of Safe-Guard’s unlicensed status.

Id. at 9 (emphasis in original). The opinion's final footnote is interesting:

In his supplemental briefing, Medina also suggests that Hall is distinguishable because in that case the plaintiff obviously “intended the entire exercise as the predicate for a UCL lawsuit” while here Medina had no such intent. However, there is no statutory basis, at least in terms of the Proposition 64 amendment, to differentiate UCL actions based on the subjective motivation of the plaintiff; the differentiation is between instances where there is actual loss of property versus no such loss.

Id. at 10 n.10 (emphasis in original). It is certainly true that there is no statutory basis to differentiate UCL cases based on the plaintiff's subjective motivations, but some courts seem to do it nonetheless. The tone of this very opinion suggests, correctly or not, that the court does in fact have a problem with the plaintiff's motivation for bringing the case. Other examples include O'Brien v. Camisasca Automotive Manufacturing, Inc., 161 Cal.App.4th 388 (2008) (review granted, no. S163207) and Buckland v. Threshold Enterprises, Ltd., 155 Cal.App.4th 798 (2007). Given the tone of these opinions, it is not unreasonable to wonder whether the outcomes may have been impacted. I'm not suggesting actual impartiality, but tone can sometimes create an appearance of it.

Sunday, July 27, 2008

On July 10, 2008, the Santa Ynez Valley Journal had an opinion piece by attorney Rosslyn (Beth) Hummer on Prop. 64 and In re Tobacco II, now pending before the California Supreme Court. After examining the issues on review in Tobacco, the piece explains what the outcome could mean for the average consumer:

But why should you care that the streamlined “non-class class” procedures of Section 17200 have changed? You should care because a brake on unscrupulous business tactics is gone. People wronged in small ways will have a much harder time getting relief. It just does not make sense to start up expensive litigation when your damages are the cost of an extra bottle of nail polish.

So while the frivolous lawsuit days may be behind us, the “fix” of this problem now means that you cannot easily get your money back if you bought a silk purse only to discover it was a sow’s ear, or if you sat down for your manicure only to learn just before the polish was applied that the polish is not included. Californians will have to wait to see how the Supreme Court rules. At this point it looks likely that streamlined unfair competition claims are no more in California.

Friday, July 25, 2008

On June 24, 2008, California Attorney General Jerry Brown filed a UCL and FAL action against Countrywide Home Loans. People v. Countrywide Financial Corp., No. LC081846 (L.A. Super. Ct., filed June 25, 2008). Here is a copy of the complaint. The UCL and FAL are the sole causes of action. The complaint seeks injunctive relief, restitution to consumers, and civil penalties of $2,500 per violation. In late June, the Daily Journal reported that "AG Seeks Restitution for Consumers from Countrywide" (subscription).

Attorneys on both sides of the battle expressed relief at the court's decision, saying they welcome a ruling deciding the issue once and for all.

"It is a significant issue nationwide and has not been settled," said Santa Clara County Counsel Ann Ravel, whose office originally filed the suit eight years ago. "So it's definitely ripe for the Supreme Court to weigh in with [its] analysis and views."

....

The case ... is heavily lawyered. Forty-two attorneys are listed on the government agencies' side, while the manufacturers show 29 lawyers from 16 law firms nationwide.

Review was granted by five of the seven Supreme Court justices, with Justices Marvin Baxter and Carol Corrigan recusing themselves. Neither said why, but statements filed with the secretary of state reveal that Baxter owns stock in BP Amoco and Corrigan in E.I. duPont de Nemours.

We note here that the adequacy of the representation of a defendant class is not a novel problem and has engaged the attention of the courts and text writers. (See cases and materials collected in 2 Conte & Newberg, Newberg on Class Actions (4th ed. 2002) § 4:60, pp. 375-384.) It is by no means an insurmountable task to identify persons who can serve as representatives of a defendant class, although the dynamics of such a class are different from that of a plaintiff class. (Id., § 4.46, pp. 336- 339.) Indeed, defendant classes have a long history, dating back to 1853. (Id., § 4.46, p. 338, citing Smith v. Swormstedt (1853) 57 U.S. 288.) California has also long recognized defendant classes. (E.g., Wheelock v. First Presb. Church (1897) 119 Cal. 477, 481-482; Rosicrucian Fellow. v. Rosicrucian Etc. Ch. (1952) 39 Cal.2d 121, 139-140.)

Slip op. at 6 (emphasis in original). The opinion says nothing more about defendant classes. Instead, it addresses whether an order sustaining a demurrer to the defendant class allegations with leave to amend was an appealable order (it wasn't). Id. at 6-9.

I was co-counsel for the employees in the appellate-level proceedings, and my normal policy is not to blog about my own cases (with an occasional exception if they are already getting outside press or blogosphere coverage). I am putting up this post only because I must clarify a comment that was attributed to me in the Recorder article:

[Kralowec] also said the 4th District's decision creates an appellate split that likely will ensure Supreme Court review. In Cicairos v. Summit Logistics Inc., 133 Cal.App.4th 949, Sacramento's 3rd District ruled in 2005 that employers have an affirmative duty to ensure that employees receive meal periods.

I do believe that the new Brinker decision creates a split in authority with Cicairos, and I also believe that the Supreme Court often grants review to resolve issues that are the subject of a split among the lower courts, particularly when two Court of Appeal panels have handed down conflicting published opinions. However, I did not say that I thought that in this specific case, the split between Brinker and Cicairos "likely will ensure Supreme Court review." I would never say something so presumptuous. It would have been more accurate to say that Brinker creates an appellate split, that such splits often lead to Supreme Court review, that Brinker is a particularly appropriate case for review, and that I certainly hope that the Supreme Court decides to grant review.

Brinker disagrees with many prior opinions, most specifically, Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, 962-963, which it discussed at length, and Bufil v. Dollar Financial Group, Inc. (2008) 162 Cal.App.4th 1193, which it did not even mention, and more generally, a string of cases which promote class actions as an efficient way to resolve wage and hour disputes and a string of cases which discuss the remedial nature of wage and hour laws in California. With Brinker and Cicairos presenting such starkly contrasting views on California law, with Brinker presenting so many novel ideas regarding wage and hour claims and class actions, and with so many U.S. District Court cases disagreeing with Cicairos and each other, this case looks like an outstanding candidate for Supreme Court review.

Tuesday, July 22, 2008

The Courts of Appeals for the Second, Fourth, Seventh and Ninth Circuits have all issued CAFA-related opinions in recent weeks:

In Luther v. Countrywide Home Loans Servicing, LP, ___ F.3d ___ (9th Cir. Jul. 16, 2008), the Ninth Circuit held that CAFA's "general grant of the right of removal of high-dollar class actions does not trump" section 22(a) of the Securities Act of 1933 (15 U.S.C. section 77v(a)), which contains a "specific bar to removal of cases [filed in state court and] arising under the ... Act." Slip op. at 6-7.

In Strawn v. AT&T Mobility, ___ F.3d ___ (4th Cir. Jun. 30, 2008), the Fourth Circuit held, for the first time, that CAFA did not alter the removing party's ordinary burden of proving that a basis for federal jurisdiction exists. Slip op. at 8 (citing Abrego Abrego v. Dow Chem. Co., 443 F.3d 676 (9th Cir. 2006)). The opinion goes on to address CAFA's $5 million jurisdictional minimum and how it can be established. Id. at 8-11. [Via Competition Law360]

In Spivey v. Vertrue, Inc., ___ F.3d ___, 2008 WL 2357099 (7th Cir. Jun. 11, 2008), the Seventh Circuit held, contrary to a number of other Circuits, that "less" means "less" (or, rather, "fewer") and not "more" when it comes to the time limit to appeal from a remand order. Coming from that Circuit, such a ruling is not really all that surprising. Accordingly, a petition for permission to appeal filed "not less than 7 days" after the remand order was timely. "To the possibility that this gives litigants forever to appeal, and thus interferes with the objective of ascertaining the correct forum as quickly as possible, we say: No way." Slip op. at 6. In the absence of a specific deadline in CAFA, Federal Rules of Civil Appellate Procedure 4(a) and (5)(a)(2) impose a thirty-day default deadline, which "allow[s] a party 23 days more than the authors [of CAFA] anticipated." Id.

Finally, in Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir. May 13, 2008), the Second Circuit "join[ed] our sister circuits in interpreting the statute to mean 'not more than 7 days.'" Slip op. at 7 (emphasis in original). The opinion then went on to address the "securities exceptions" to CAFA jurisdiction, ultimately adopting an extremely narrow interpretation of those exceptions, and holding (over the dissent of one judge) that they did not apply to the case before it. Id. at 13-23.

Information Week had an article last Tuesday on a new UCL action that my firm recently filed against Google. The action challenges certain aspects of Google's AdWords program, specifically, the practice of charging advertisers for ads placed on parked domain and error pages. A copy of the complaint is available at the Courthouse News website. Legal Blog Watch and The Complex Litigator both have posts on the new case, and last Friday's print issue of the Recorder reprinted the Legal Blog Watch post verbatim ("Lawyer Sues Google Over Ad Placement").

If you are a Google AdWords advertiser interested in exploring the possibility of becoming involved in the case, please feel free to drop me a line (uclpractitioner@gmail.com) or give me a call (415-788-4220).

that the PlayStation 2s suffered from an “inherent” or “fundamental” design defect that rendered them unable to play DVDs and certain game discs. The complaints set forth causes of action for breach of express and implied warranties, fraud, negligent misrepresentation, bad faith, violations of the Consumer Legal Remedies Act (Cal. Civ. Code § 1750 et seq.), false advertising (Cal. Bus. & Prof. Code § 17500 et seq.), and unfair business practices (Cal. Bus. & Prof. Code § 17200 et seq.). The assertions in the false advertising and negligent misrepresentation claims primarily revolved around Sony’s statements in press releases, advertising, product packaging, and instruction manuals that the PlayStation 2 would function as a DVD player as well as a game player.

UPDATE: Speaking of blogging, today (and yesterday) I'm attending BlogHer08, the fourth annual BlogHer conference. This year, the conference is in my home town of San Francisco at the Westin St. Francis Hotel. I've attended this conference each year since 2005 and it is always very good. This morning, I'm attending a session on blogger burnout and how to remain engaged and interested in blogging over the long haul.

In a related development, on July 1, the Rhode Island Supreme Court handed down an opinion addressing the contingency fee issue raised in this case and citing the Court of Appeal's opinion (which is no longer citable in California courts). State of Rhode Island v. Lead Indus. Assn., ___ A.2d ___ (R.I. July 1, 2008) (slip op. at 71-75).

Last but not least, I have received copies of more briefs from the case. Here is a complete list of what I have:

Thursday, July 17, 2008

In In re Red Light Photo Enforcement Cases, 13 Cal.App.4th 1314 (Jun. 13, 2008), the Court of Appeal (Fourth Appellate District, Division One) appeared to assume without deciding that a UCL claim may be predicated on an attempt to enforce a contract between the defendant and a third party with provisions that are void as contrary to public policy:

Plaintiffs contend the court erred by finding for ACS, because the contingency fee contracts between it and the municipalities were void as against public policy and thus were predicates for UCL claims.

Business and Professions Code section 17200 does not proscribe specific practices, but broadly prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." The UCL "governs 'anti-competitive business practices' as well as injuries to consumers, and has as a major purpose 'the preservation of fair business competition.' [Citations.] By proscribing 'any unlawful' business practice, 'section 17200 "borrows" violations of other laws and treats them as unlawful practices' that the unfair competition law makes independently actionable." (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) " 'Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition — acts or practices which are unlawful, or unfair, or fraudulent. "In other words, a practice is prohibited as 'unfair' or 'deceptive' even if not 'unlawful' and vice versa." ' " (Ibid.)

"It is well established that our courts, like those of other states, may, in appropriate circumstances, void contracts on the basis of public policy. Of course '[t]he determination of public policy of states resides, first, with the people as expressed in their Constitution and, second, with the representatives of the people — the state Legislature.' [Citation.] . . . ' "[U]nless it is entirely plain that a contract is violative of sound public policy, a court will never so declare. 'The power of the courts to declare a contract void for being in contravention of sound public policy is a very delicate and undefined power, and . . . should be exercised only in cases free from doubt.' " ' " (City of Santa Barbara v. Superior Court (2007) 41 Cal.4th 747, 777, fn. 53, italics added.) "[A] contract should be construed to be valid and enforceable rather than void as against public policy." (Underground Constr. Co. v. Pacific Indemnity Co. (1975) 49 Cal.App.3d 62, 67; Civ. Code, §§ 1643, 3541.)

Slip op. at 22-23 (footnote omitted) (emphasis in original). Neither of the two cases cited in that last paragraph were UCL cases. The opinion goes on to discuss contract law principles and does not mention the UCL again. I suppose the predicate for the UCL claim is the idea that conduct sufficiently contrary to public policy so as to render a contract void is also "unfair" conduct within the meaning of the UCL. The trial court had earlier found no statutory violation, which would seem to have eliminated any "unlawful" prong claim. Id. at 6-7 n.3. The Court of Appeal ended up affirming the judgment in the defendant's favor.

For purposes of this blog's subjects of focus, two passages from the opinion stand out. The first addresses the burden of proof in the class certification context when key evidence rests within the defendant's control (which it frequently does, particularly in wage and hour class actions):

In general, “[e]xcept as otherwise provided by law, a party has the burden of proof as to each fact the existence or nonexistence of which is essential to the claim for relief or defense that he is asserting.” (Evid. Code, § 500.) On occasion, however, courts may alter the normal allocation of the burden of proof. (National Council Against Health Fraud, Inc. v. King Bio Pharmaceuticals, Inc. (2003) 107 Cal.App.4th 1336, 1346; see, e.g., Sargent Fletcher, Inc. v. Able Corp. (2003) 110 Cal.App.4th 1658, 1670 [burden of proof on issue of causation will be shifted to the defendant when circumstances make it impossible for the plaintiff to prove its case].) “ ‘In determining whether the normal allocation of the burden of proof should be altered, the courts consider a number of factors: the knowledge of the parties concerning the particular fact, the availability of the evidence to the parties, the most desirable result in terms of public policy in the absence of proof of the particular fact, and the probability of the existence or nonexistence of the fact.’ [Citation.]” (Lakin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 660-661.)

One long-standing application of burden-shifting occurs in the wage-and-hour context when an employer’s compensation records are so incomplete or inaccurate that an employee cannot prove his or her damages. When the United States Supreme Court addressed this problem with regard to claims under the Fair Labor Standards Act of 1938 (29 U.S.C. § 201 et seq.), it observed that the remedial nature of the statute and public policy “militate against making [the evidentiary burden] an impossible hurdle for the employee.” (Anderson v. Mt. Clemens Pottery Co. (1946) 328 U.S. 680, 687 (Anderson).) Considering that an employer has a statutory duty to maintain proper records of wages, hours and work conditions and is in the best position to know salient facts about the nature and amount of work performed, the court concluded it is appropriate to shift the burden of proof to the employer. (Id. at pp. 687-688.) Specifically, once an employee proves he or she “has in fact performed work” that was improperly compensated, and presents enough evidence to allow an inference as to the amount of this work, the burden shifts to the employer to prove the precise amount of work performed or to negate the inference drawn from the employee’s evidence. (Ibid.) The high court observed that applying the normal burden of proof in such circumstances would unfairly penalize an employee for the employer’s failure to keep proper records and would allow the employer to keep the benefits of the employee’s labors without paying full compensation. (Id. at p. 687.)

In addition, California has long approved of burden-shifting outside the wage-and-hour context when the parties have unequal access to evidence necessary to prove a disputed issue. “ ‘Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim.’ [Citations.]” (Sanchez v. Unemployment Ins. Appeals Bd. (1977) 20 Cal.3d 55, 71 (Sanchez).) ....

It makes sense to apply burden-shifting in this case because, as plaintiffs’ employer, Cintas is in the best position to know which class members worked on the Hayward contracts and at which times. Although the LWO imposes no record-keeping requirements as such, the entire aim of the ordinance is to require contractors to pay a living wage to employees who work on service contracts with the City. Thus, if a contractor does not wish to compensate all its employees in accordance with the LWO, the onus is on the contractor to segregate work on Hayward contracts and assign it to specific employees, or at least to keep records of which employees perform contract-related work. Given Cintas’s control over workflow and its greater knowledge about the obligations imposed by the LWO, it would be unrealistic and unfair to expect individual class members to prove they performed work related to the Hayward contracts.

Slip op. at 24-26 (footnote omitted) (emphasis added).

The second noteworthy passage relates to whether the Private Attorney General Act (Labor Code sections 2698 et seq.) ("PAGA") applies to cases filed before its effective date, which was January 1, 2004. The Court of Appeal relied in part on the Prop. 64 retroactivity decision, Californians for Disability Rights v. Mervyn’s LLC, 39 Cal.4th 223 (2006), in holding that it does:

Our case is the procedural opposite of Mervyn’s, because PAGA granted private parties standing whereas Proposition 64 took their standing away absent a showing of injury. But the high court’s analysis of retroactivity is directly on point. Like Proposition 64, PAGA did not impose new or different liabilities on defendants based on their past conduct. (See Mervyn’s, supra, 39 Cal.4th at p. 232.) It merely changed the procedural rules governing who has authority to sue for certain penalties. Like the amendments to standing addressed in Mervyn’s, PAGA’s extension of standing to private parties is prospective in nature. Accordingly, it was properly applied to the claims pending in this lawsuit.

Tuesday, July 15, 2008

In April 2007, the Daily Journal ran an article by yours truly called "The Class Representative's Pre-Certification Bill of Rights" (subscription). To those mentioned in the article can now be added the right to select class counsel and to waive conflicts of interest on behalf of the putative class.

In Sharp v. Next Entertainment, Inc., 163 Cal.App.4th 410 (May 28, 2008) (Second Appellate District, Division Three), a union subsidized wage and hour class action litigation against non-unionized companies as part of an organizing campaign targeting those companies. The union referred potential plaintiffs to its own longtime attorneys, who filed the actions as counsel for the plaintiffs and the putative class. The union paid the attorneys' fees and costs, and the putative class representatives signed a written conflicts waiver disclosing this fact and the attorneys' continued, simultaneous representation of the union in other matters. Although the union paid for the litigation, the individual plaintiffs remained responsible for strategy decisions.Id. at 416-18. The trial court denied a motion to disqualify class counsel and/or to disqualify the named plaintiffs from acting as proposed class representatives -- although it did order the erection of "ethical walls" that prohibited the attorneys from discussing the litigation with the union "except with regard to the payment of fees." Id. at 421-22. The Court of Appeal affirmed.

The Court addressed the interplay between the Rules of Professional Responsibility (specifically Rule 3-310) and the procedural rules governing class actions. The Court rejected the defendant's argument that the named plaintiffs could not effectively waive any conflicts of interest and that, instead, "each and every member of the two putative classes was required to provide written consent to representation by the [union's] firm" (id. at 431-32):

[I]n actuality, defendants' argument is a request that we require all members of the class opt-in to the class action litigation. However, opt-in procedures conflict with California's class action procedures and inevitably are methods that permit a class action defendant to chip away at the size of a class. (Hypertouch, Inc. v. Superior Court, supra, 128 Cal.App.4th at pp. 1543-1550.) Were we to require a procedure by which each and every member of a class action lawsuit has to agree to the choice of class counsel, we would eviscerate the class action device that is designed to permit class members to sit back through the process, knowing there are safeguards for their protection. (Id. at p. 1539.)

Id. at 432. The Court also observed that the class certification procedure ensures that only class representatives who are are found "adequate" will be permitted to represent the class (and thus, for example, waive conflicts of interest on its behalf):

Additionally, the class action procedures already include a system by which the court determines if the named class representatives can adequately represent the class. These procedures ensure that if there are conflict of interest issues, the representative plaintiffs are capable of providing informed consent on behalf of the class. The plaintiffs seeking certification have the burden to show that they can adequately represent the class by vigorously and tenaciously protecting the class members’ interests. (Lockheed Martin Corp. v. Superior Court (2003) 29 Cal.4th 1096, 1104; Simons v. Horowitz (1984) 151 Cal.App.3d 834, 846.) As part of this analysis, the trial court assesses the competency of class counsel, if the firm is representing the class as a whole and not simply the interests of the named representative plaintiffs (Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d 462, 471; Cal Pak Delivery, Inc. v. United Parcel Service, Inc. (1997) 52 Cal.App.4th 1, 12-13 (Cal Pak Delivery)), and if the named plaintiffs have lent their names to litigation that is controlled by class counsel. (Howard Gunty Profit Sharing Plan v. Superior Court (2001) 88 Cal.App.4th 572, 579-580.) A person’s class representative status may be defeated if there is a serious conflict among the members of the class that “goes to the very subject matter of the litigation . . . .” (Richmond v. Dart Industries, Inc., supra, at p. 470; Global Minerals & Metals Corp. v. Superior Court (2003) 113 Cal.App.4th 836, 851; J. P. Morgan & Co., Inc. v. Superior Court (2003) 113 Cal.App.4th 195, 212-213.)

Thus, when plaintiffs seek to have the classes certified, they will have the burden of meeting these requirements. At that time, if the trial court concludes that plaintiffs’ motives for pursuing the lawsuits or their connection to the Guild make them incapable of providing informed written conflict waivers, then the trial court will not permit certification.

Id. at 432-33. Next, the Court pointed out that allowing proposed class representatives to waive conflicts on behalf of the putative class was "consistent with the ABA Model Rules of Professional Conduct," which expressly "authorize[] the class representative to provide informed consent" to any conflict of interest. Id. at 434-35 (citing ABA Model Rules of Professional Conduct, Rule 1.7, cmt. 25).

Finally, the Court observed that to apply the disqualfication rules here would contravene the public policy purpose of class actions and would also implicate the First Amendment:

In the realm of class actions, the rules of disqualification cannot be applied so as to defeat the purpose of the class proceedings. (Cf. Lazy Oil Co. v. Witco Corp. (3rd Cir. 1999) 166 F.3d 581, 589-590 [traditional rules of professional conduct cannot be applied mechanically in the realm of class actions].) Rather, the circumstances of each case must be evaluated.

The motion to disqualify here is not brought by one of the parties who may suffer because of a purported conflict, but by opposition parties who are not directly touched by the purported conflict. Disqualification of the [union's] firm may impose a significant hardship on plaintiffs, who will bear the burden on finding replacement counsel with the skills and knowledge of the Rothner firm, a firm that already has expended more than 1,000 hours on the case, including the review of more than 8,000 pages of documents over seven months. (McPhearson v. Michaels Co. (2002) 96 Cal.App.4th 843, 849-850.) As such, we must be skeptical of the impetus and purpose of defendants’ motion to disqualify the [union's] firm because it poses the very threat to the integrity of the judicial process that it purports to prevent. Such motions “can be used to harass opposing counsel, to delay the litigation, to intimidate an adversary into accepting settlement on otherwise unacceptable terms, or for other strategic purposes. [Citation.]” (Ibid.; accord, Zador Corp. v. Kwan, supra, 31 Cal.App.4th 1285; cf. McPhearson v. Michaels Co., supra, at pp. 849-850 [generally conflicts may be waived by persons personally interested and courts must be skeptical when disqualification motions are brought by opposing parties.)

Lastly, we cannot ignore the public interest consequences of permitting the disqualification of the [union's] firm at this point in the litigation. “It is the policy of this state to vigorously enforce minimum labor standards in order to ensure employees are not required or permitted to work under substandard unlawful conditions . . . and to protect employers who comply with the law from those who attempt to gain a competitive advantage at the expense of their workers by failing to comply with minimum labor standards.” (Lab. Code, § 90.5.) Constitutional rights of association, speech, and assembly permit unions to provide, and assist in obtaining, legal services for their members. (United Transportation Union v. Michigan Bar (1971) 401 U.S. 576; Mine Workers v. Illinois Bar Assn. (1967) 389 U.S. 217; Railroad Trainmen v. Virginia Bar (1964) 377 U.S. 1; cf. Frye v. Tenderloin Housing Clinic, Inc. (2006) 38 Cal.4th 23, 39 [“The First Amendment protects the associational and expressive rights of persons – both lawyers and nonlawyers – to join together to employ litigation to seek redress of grievances.”].)

Wage and hour litigation is often financed by labor unions to support their members and members of the public because employees often lack the resources to do so. Such litigation is designed to protect all workers, including members of the union and non-members. (E.g., Shaffer v. Farm Fresh, Inc. (4th Cir. 1992) 966 F.2d 142; Aguiar v. Cintas Corp. No. 2 (2006) 144 Cal.App.4th 121, 125; cf. Gentry v. Superior Court (2007) 42 Cal.4th 443 [recognizing that class actions play important role in enforcing labor laws].) To deny these employees access to attorneys knowledgeable in labor law based upon an objection filed by their employer, when the named representatives of the class action lawsuit and the union have waived all conflicts and the motion is brought before class certification is sought will provide a tactical edge to the employer at the expense of the putative class. It will also preclude attorneys from representing union members if the attorneys have assisted the union in pre-litigation activities. (See, McClendon v. Continental Group, Inc. (D.N.J. 1986) 113 F.R.D. 39, 42-43 [union funding does not make interest of named parties antagonistic to interests of class].) The California Rules of Professional Responsibility cannot be construed so as to prohibit this type of advocacy. Further, they cannot be construed so as to hurt class members, under the guise of protecting them.

Id. at 434-35 (footnote omitted).

As for the defendants' alternative argument that the named plaintiffs themselves were inadequate to represent the class, the Court found the argument premature:

Here, however, defendants preemptively raised the issue of plaintiffs' qualification to serve as representative parties. Defendants' disqualification motion was an end-run around the certification procedures and an attempt to deny plaintiffs the ability to present their case. When plaintiffs seek to certify the classes, they will have the burden to prove that they can adequately represent the classes as defined in the two class action lawsuits. At this stage of the proceeding, the issue is premature. Plaintiffs are only representing themselves.

Id. at 439 (footnote omitted) (emphasis added). This part of the opinion is particularly interesting because of its inconsistency with another case handed down a couple of weeks later, In re BCBG Overtime Cases, 163 Cal.App.4th 1293 (Jun. 13, 2008) (Fourth Appellate District, Division Three). I will discuss that case in a future post. Meanwhile, Wage Law has more on Sharp.

Monday, July 14, 2008

In Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137 (9th Cir. 2008), the Ninth Circuit construed the UCL in the context of a competitor action. The plaintiff, a producer of karaoke records, alleged that the defendant, a competing karaoke producer, falsely represented to its customers (who are "distributors and retailers that resell these records to the public") that all songs on their records are 100% licensed for copyright purposes. This conduct, the plaintiff alleged, gave the defendant a competitive advantage, and the plaintiff lost money as a result. Id. at 1141, 1152 & n.7. The district court dismissed the plaintiff's UCL claim, and the Ninth Circuit affirmed.

As an initial matter, the Ninth Circuit set forth the standards governing UCL "unlawful," "unfair," and "fraudulent" prong claims in competitor actions, notably reciting the pre-Prop. 64 formulation of "fraudulent":

Id. at 1151-52. In the Ninth Circuit's view, this particular UCL claim was predicated largely on the terms of the contracts between the defendant karaoke producer and the retailers/distributors, which are what obligated the producer to obtain full copyright licenses for the songs in the first place:

We first address the claims based on contracts and misrepresentations to which Sybersound was not a party, namely the misrepresentations to the Customers and copyright holders about payment of royalties and licenses, which sound in contract law. Under the sweeping standing provisions of California’s UCL, “[s]ection 17200 does not require that a plaintiff prove that he or she was directly injured by the unfair practice or that the predicate law provides for a private right of action.” Gregory v. Albertson’s Inc., 128 Cal. Rptr. 2d 389, 392 (Ct. App. 2002). “[A] breach of contract may form the predicate for a section 17200 claim, provided it also constitutes conduct that is unlawful, or unfair, or fraudulent.” Nat’l Rural Telecomm. Coop., 319 F. Supp. 2d at 1074 (internal quotation and citation omitted). Sybersound, however, has not pled that the breaches of contract are independently unlawful, unfair, or fraudulent, merely that the Corporation Defendants do not pay royalties or acquire licenses from other co-owners, in breach of their contracts with licensors and the Customers.

Id. at 1152 (footnote omitted). The Ninth Circuit concluded, for reasons akin to the concerns that underlie the equitable abstension doctrine, that the plaintiff should not be allowed to bring these UCL claims on behalf of the sophisticated contracting parties:

Because the unfair competition claim is based upon the misrepresentations that occurred in separate business relationships among karaoke records producers, licensors, and the Customers, the court would be placed in the awkward situation of enforcing private contracts among sophisticated parties who are not all parties to this lawsuit. See Gregory, 128 Cal. Rptr. 2d at 396 (dismissing a UCL claim and noting that the specific remedy sought under the UCL would “cause the court to assume the roles of real estate broker or property manager . . . [and] require the court to make competitive business judgments.” (internal quotation omitted)).

In this case, forcing “Defendants to fully license their products” and enforcing sales and royalties contracts through this litigation may “leave victims worse off than they would be if they filed individual actions against [defendants].” Rosenbluth Int’l, Inc. v. Superior Court, 124 Cal. Rptr. 2d 844, 847 (Ct. App. 2002) (dismissing a UCL claim that was based on a contract where the public in general was not harmed by the defendant’s unlawful practices, but where the victims of the unlawful actions were sophisticated corporations that negotiated their individual contracts with defendants). Courts are institutionally ill-suited to enforce and superintend private contracts among business entities where the concerned entities themselves are not parties to the suit.

Id. at 1153. As for any non-contract-based misrepresentations, the Ninth Circuit disposed of them as follows:

Sybersound’s allegations that [the defendants] falsely told the Customers that Sybersound’s karaoke recordings infringed on copyrights also fail to state a claim. Since Sybersound cannot state a claim under the Lanham Act or the Copyright Act and has not pled any other unlawful acts under which this claim would fall, it cannot meet the unlawful conduct prong of the UCL. Moreover, Sybersound has also not pled an act that would be an incipient violation of antitrust law, as required under Cel-Tech for claims against competitors. Finally, Sybersound has not pled that these misrepresentations are likely to deceive members of the general public.

Accordingly, we conclude that the UCL claim was also properly dismissed by the district court.

Id. This opinion's approach to the UCL is much more conservative than that of another Ninth Circuit panel in a case handed down just two months later. Williams v. Gerber Products Co., 523 F.3d 934 (9th Cir. 2008) (discussed in this blog post).

Sunday, July 13, 2008

I'm planning to resume regular blogging this week. I'm going to go through my stack of cases and other blog-related material in chronological order (more or less) until we're back up to date. I'll start on Monday with a Ninth Circuit UCL opinion from February. I'll then move to a Court of Appeal decision from May, then on Wednesday I'll be into the cases from June (of which there are quite a few). I will break into the chronological sequence with any significant new developments, such as important Supreme Court activity. I already have enough material sitting on my desk for more than a month's worth of blog posts!

Petition for Review GRANTED. Further action in this matter is deferred pending consideration and disposition of related issues in In re Tobacco II Cases, S147345, and Meyer v. Sprint Spectrum, LP, S153846 (see Cal. Rules of Court, rule 8.512(d)(2)), or pending further order of the court. Submission of additional briefing, pursuant to California Rules of Court, rule 8.520(a) is deferred pending further order of the court.

In O'Brien, the Court of Appeal (Fourth Second Appellate District, Division Three) affirmed summary judgment in the defendant's favor, holding that the plaintiff lacked standing to assert UCL or CLRA claims because he did not suffer injury in fact as a result of the defendant's alleged misconduct. The suit challenged the defendant's purported mislabeling of its products as "Made in the U.S.A." O'Brien v. Camisasca Automotive Manufacturing, Inc., 161 Cal.App.4th 388 (2008). My original blog post on O'Brien is at this link.

Thursday, July 10, 2008

Next Tuesday, July 15, 2008, my partner Miranda P. Kolbe will be speaking at Bridgeport Continuing Education's annual Class Action and UCL Conference, which will take place at San Francisco State University's Downtown Campus (835 Market Street). Her co-speaker is Erica L. Craven of Levy Ram & Olson, and their segment is called "17200 after Prop. 64 — Who Won and Who Still has a Chance?"

Additionally, Judge Ronald M. Sabraw (Ret.) will speak on "The Nuts and Bolts of Settling a Class Action." That's a segment I'd like to see. The rest of the speakers will cover CAFA, class certification (with plaintiff and defense strategies), electronic discovery in class actions, the False Advertising Law (Bus. & Prof. Code sections 17500 et seq.) and the CLRA. Registration is still open and I encourage everyone to sign up to attend!

Wednesday, July 02, 2008

Tom McNichol advises attorneys to "resist the temptation to start a blog" in this story in the July 2008 issue of California Lawyer:

Most attorneys at small firms are busy enough keeping up with their cases without taking on a blog. However, there are a few exceptions. If you have a very specific area of interest in law, one that can help make your firm stand out from the crowd, a well-written blog can be a provocative attention getter and a potential rainmaker. One example of a well-done blog is The UCL Practitioner, written by San Francisco class action attorney Kimberly A. Kralowec. It has a very tight focus – California's Unfair Competition Law – and is updated frequently.

Hmm, "updated frequently." I'd better end my hiatus and get back to blogging pretty soon. Thanks to Tom for the mention – a pleasant surprise – and welcome new readers!